Crude Firms Amid Renewed Warnings of a Price "Super Spike"

Monday July 9, 2018

Monday crude trading was a case of same old same old, with geopolitical tension plus reports of declining oil inventories causing nervous traders to give West Texas Intermediate a modest boost of 5 cents to $73.85 per barrel and Brent to climb more substantially, by 96 cents to $78.07.

Accompanying the gains was yet more speculation of just how high crude could climb in this climate of fear and unrest, with one noted expert predicting prices above $150 per barrel.

Andrew Lipow, president of Lipow Oil Associates, summarized Monday's market performance by noting that "We continue to see the oil market supported, with growing concern on sanctions on Iran now that the European and Korean refiners reduced their purchases to virtually zero."

Reiterating familiar worries, Lipow added, "There is concern that the Saudi Arabia and Russian increases in production might not be nearly enough to offset - not just Iranian production - but also supply disruptions that we're seeing from Libya, Nigeria, and Canada."

Mustafa Sanalla, head of Libya's National Oil Corporation, reported that his country's output has more than halved in five months, falling to 527,000 barrels per day (bpd): "Tomorrow it will be less and the day after tomorrow less again; and we are going lower."

Libya was pumping in excess of 1.6 million bpd before political conflict led to the shutdown of key port terminals.

Meanwhile in Canada, Suncor Energy IncĀ  said that some production would return in July, sooner than expected, but full operations wouldn't resume until September at its 360,000 bpd oil sands facility.

Capping Monday's dismal news was a reminder from Gary Ross, head of global oil analytics and chief energy economist for S&P Global Platts, that "We've seen a dramatic drop in inventories over the past year, over 200 million barrels" due to the Organization of the Petroleum Exporting Countries (OPEC) output cuts and the collapse of Venezuela's production capabilities.

Ross also noted that "Two thirds of what drives price is inventory change, so if inventories are going down it's hard for price not to go up," and he too questioned whether countries such as Saudi Arabia can boost output enough to offset production losses elsewhere.

Ross was reluctant to say where prices would go other than upwards, but Bernstein Research had no such hesitancy and theorized that oil could top $150 per barrel - because energy companies' reinvestment ratio, which measures cash flow against investment in oil and gas exploration and production, is the lowest in a generation.

Bernstein estimates that 15 companies account for 80 percent of the world's oil reserves, and only two of them - Exxon and BP - are investing appropriately in the big, long-cycle projects that yield huge crude payloads.

Bernstein warned in a note, "Oil remains an essential part of our lives; any shortfall in supply will result in a super-spike in prices, potentially much larger than the $150 barrel spike witnessed in 2008", and it went on to state that if companies do nothing to replenish their reserves, they will last for 10 years, compared with 15 years of coverage in 2000.

Even though Bernstein is hardly alone in predicting calamitously high oil prices, not every expert is convinced that the industry is headed for chaos: for example, Citigroup and BMO, while agreeing that prices will escalate, think oil in the triple digits is unlikely, because among many factors Iran will probably still be able to export to the many countries that don't support the U.S. sanctions against the Islamic Republic.